Boy, that Bush tax cut really lit a fire under the economy, huh?

Great Debates
21

First, the government doesn’t necessarily buy a widget, and when it does it tends to be a less than efficient consumer.

Second, give a consumer $600, and he tends to spend $1,000 or more. He is more likely to spend that money on goods and services than the government is, and he is more likely to do it in a way that gives that cash the possibility of expansion.

Third, when the consumer spends the money, plus whatever additional cash it motivates him to spend, and that money expands, it creates something called revenue, which is taxable. A portion of that money then comes back to the Government as revenue.

For example, I took the money and bought a suit from a local retailer. That put $600 in the retailers pocket, the majority of which gets spent again by the retailer or his employees. If the markup was 100%, than in a simplistic model he made $300 which was taxable.

22

mangeorge:

The economy isn’t worse.

23

Oh come on. Republicans always advertise tax cuts as magic bullets. And no, this one did not “surely” stimulate the economy. (See my last post.)

The rate cuts by the Fed are the only things keeping this economy (barely) above water. Why are consumers still spending? Because they are borrowing huge sums against the equity in their homes. Heaven help them if the real estate market crashes. They will find they owe more than their homes are worth. As it is, forclosure rates are shooting up.

24

Scylla said

Everything I read would indicate that consumer deficit spending is keeping this sick puppy(to continue the metaphor) alive. Consumers spent that $300/$600 a loonng time ago. They’re just using their credit cards to keep the economy from totally colapsing.

25

And Joe Taxpayer doesn’t necessarily buy a wadget. He may see hard times coming and just pay off a credit card. Or he may put the money in a savings account. Zero economic stimulus.

Still no difference, economic-stimulus-wise. If the government spends $600 on a widget, the widget maker earns a profit which is taxable. The widget maker pays his employees. They spend money and pay taxes as well.

Where’s the difference?

26

And further to my argument, I give you Exhibit A, the current state of the economy, and Exhibit B, the current state of the Federal budget.

27

Actually, if JT puts the money in the bank, there is an economic stimulus, since the bank can lend out a portion of his savings. In fact, that’s one of the main ways money is created.

28

A) The tax refund didn’t get you fired.

B) What makes you think that there is anything to be done by a President, regarding the economy? Should he pass a law, making it a federal offense for the economy to not perform well?

I’d love to hear what you think a head of state can/shoudl do for ‘the economy’.

29

Greenspan advised against the tax cut. Various Wall Street commentators described the Street as “unenthusiastic” about the cut, hoping the Government would clear up the deficit entirely before the cut.

Bush listened to nobody. As usual. :rolleyes:

30

Brutus - the claim wasnt’ that the tax refund got him laid off, but that the economy in the crapper certainly was a definate factor.

The economy is an important part of the ‘state of the nation’, and as it’s CEO, the president damn well better have some ideas on how to deal w/it.

Certainly, the Pres has much to do w/the budget process, and government spending. to suggest that his hands are completely tied is, well, interesting, shall we say?

31

And let’s face it: even in the most generous view of that tax cut, it was like throwing a rubber ducky to a drowning man and saying “Climb on this!”

32

I might note that the OP addresses what is, at bottom, a technical question, one that is susceptible to empirical analysis.

Scylla claims: "Second, give a consumer $600, and he tends to spend $1,000 or more. He is more likely to spend that money on goods and services than the government is, and he is more likely to do it in a way that gives that cash the possibility of expansion. "

Sorry to be mean but LOL. I mean, CITE?

I guess you’re saying that tax cuts reduce savings. In economic parlance, you are assuming a marginal propensity to consume of 1.67. Wow, talk about wishful thinking. Every estimate I’ve seen has involved numbers less than 1.0.

Or perhaps Scylla believes that an increase of wages or non-tax cut income of $1 will increase consumption by less than $1, but your magical-mystical tax cut will increase consumption by more than that amount. Or maybe you don’t, in which case any tax cut will result in infinite stimulus to the economy via an infinite multiplier. That would be an ideologically-driven theory that exceeds even the Laffer fantasy.

I knew you could do it Scylla. Congratulations.

Also, listen to what you’re saying: a consumer is more likely to spend a higher share of a $1 tax cut, than the government would if it increased spending by $1. Huh? If the government buys a new tank, spending goes up by that amount. OTOH, if the government hands the same amount to a person, some of the stimulus is diverted into savings, which provides no short run stimulus to the economy.

pkbites claims: Any tax increase or cut usually needs 2-4 fiscal years to affect any economy.

Cite? Furthermore, if that’s the case (which it isn’t) then W’s tax cut would an exceedingly poor way to stimulate the economy: it would take effect only after the recession is over! Thanks for the liberal argument, pk, but if you don’t mind I would prefer to toss that particular fish back in the water.

Advice to posters: Pull out your introductory economics text. If you don’t have one, that’s ok but please re-read the first sentence of this post. Thanks.

33

Brutus would, “love to hear what you think a head of state can/should do for ‘the economy’.”

No problem, ya big big Brute!

I would recommend that the President shape counter-cyclical budgets, to complement the counter-cyclical monetary policy run by the central bank.

That means cutting taxes/increasing spending during recessions (implying budget deficits) and increasing taxes/cutting spending during good times (implying budget surpluses).

(To complicate matters, a one dollar change in spending will have a bigger effect on the economy than an equal change in taxing. Empirical reality can be such a bummer. Elaboration available upon request.)

34

OK, I’ll bite. Why?

35

When I got my $300 check, I opened it, turned it over, wrote “Pay to the order of My Visa Card People” on the back, and stuck it back in the mail.

I am not sure if doing this stimulated the economy at all. I didn’t find it particularly stimulating, personally.

Then again, I have now paid off my Visa bill, so hoorah for me.

36

Scylla hypothesizes, “The economy isn’t worse.”

Hm. Well, according to this week’s Economist,

US Unemployment Rate:
Aug 2002: 5.7%
> Aug 2001: 4.9%

Thank you for providing a falsifiable (and falsified) hypothesis.

That said, it is true that the current downturn is fairly mild compared to the 1974-75 and 1979-1982? recessions. Touch wood. (BTW, unemployment in the EU has risen as well over the past year, but by only 0.3%).

37

squeegee requests elaboration.

  1. Short reference: See “balanced budget multiplier”.

  2. Short tangent: When government spending increases by $1, the stimulus doesn’t stop there. Those receiving the extra funds, will spend a share of it on domestic goods. (Another share will be saved and some will be spent on imports). Say that spending-share (or marginal propensity to consume) is .8. Then the total eventual stimulus to the economy will be $1 + .80 + .8*.8 + .8*.8*.8 … etc. Those familiar with infinite series will realize that it will total to 1/.8 = 5 in the end.

(In practice, the number is less than .8, once imports are considered).

  1. Your answer: A similar process occurs when taxes are cut. The difference is that while an increase of government spending causes the “first round” of spending to rise by $1, the tax cut case causes first round spending to increases by only 80 cents (for MPC=.8).

In other words, when the government buys a $1000 hammer, the immediate increase in spending is $1000. If it hands $1000 to a consumer though, some share of it will be saved, resulting in less than $1000 of initial spending (and therefore less eventual stimulus).

So, in my $1 example, Eventual Spending caused by Tax cut = Eventual Spending Caused by Government Purchase - $1 = $5 - $1 = $4, which is less than the $5 of govt. spending stimulus.

  1. Similarly, tax cuts that are targeted at those with a higher marginal propensity to consume will result in higher “first round” spending and higher eventual stimulus. Examples of those with relatively high marginal propensities to consume include the poor, awkwardly enough.

  2. Purchases of capital machinery and the like by businesses are treated separately.

  3. BTW, paying off a debt (credit card or otherwise) does not count as an increase in spending.

38

I don’t need a cite. I’ve observed it through out my life.

*LBJ’s deficit spending was a major factor of the economic turn down of the mid 70’s

*Ronald Reagans economic stimulus plans did not begin to work until 3-4 years after it was enacted.

*George Bush sr’s tax increase took 2 years to kill the economy.

*the Republican Congress’s change to capital gains tax, as it applies to real estate, took 2 years to increase the housing market even more (of course, Clinton took credit for that:rolleyes: )

My observations over the years are just as valid as some know it all economists web site. It takes 2-4 fiscal years to begin to realize the full impact of any tax or economic change.

39

I’m not going to argue whether or not Bush’s cut had a positive effect on the economy - long experience has taught me that these debates cannot be won or lost.

However, the notion that the economy’s current state is proof of ANYTHING is silly. I could just as easily say, “Man, it’s a good thing that Bush put through that tax cut, because otherwise the economy would REALLY be in the dumper.” And that assertion carries exactly as much weight as the opposite claim that Bush’s tax cut ‘didn’t work’ because the economy isn’t roaring.

These arguments cannot be won or lost through broad economic trend-spotting, for the simple reason that the government has very limited power to modify the economy through tax cuts. We’re talking about an economyt that’s producing what, 2 or 3 trillion dollars a year in GDP? And Bush’s tax cut so far has amounted to less than 50 billion dollars - most of the tax cut is ‘back loaded’ in the latter half of the ten year period.

The effect of the tax cut by now is still too small to be measurable, one way or the other.

40

D’oh! “Those familiar with infinite series will realize that it will total to 1/(1-.8) = 5 in the end.”